So, it has come to my attention that most people (read: normal people) haven't a scintilla of a clue of what I'm talking about when I go on rants about the Fed, replete with superfluous jargon. Well, there's a simple explanation for that: (a) I'm constantly in blog mode, and obviously I'm accustomed to writing for a different audience and (b) I'm just an arshole, and struggle breaking material up into bit-size, comprehensible pieces. Lynch me, I guess.

Anyway, I still really, really want to do this debate on overheating, but in the interim, here's everything you need to know about the resolution, the context, burdens, merits, etc.

1. What is "overheating?"

Overheating, simply put, is producing beyond capacity. There's some level of output, Y-bar, which corresponds to "potential." Of course, in reality that corresponds to the level of output whereafter the economy will grow at a rate consistent with its trend rate of growth. Historically, that's been about 3 percent, though a number of factors have nudged that rate downward such that it's closer to 2 percent.

Here's a reasonably palpable illustration of overheating, using a New Keynesian Phillips curve.

pi = pi^e + omega * (U - Un) + rho

where:

pi = inflation ratepi^e = inflation expectationsomega = parameter, or regression coefficient demonstrating the impact of a 1 percentage point increase in the unemployment gap on the increase in inflation, and is usually negative.U = unemployment rate.Un = natural or "normal" rate of unemployment, or a sum of frictional and structural unemployment, below which wage and price pressures will begin to build.rho -- parameter for price shocks (think 1973 OPEC-induced oil crisis).

Now, that's a short-run Phillips curve: there's a negative correlation between unemployment and inflation. If unemployment rises, there's more unused capacity so people spend less, businesses invest and hire less, and there's less pressure on wages. The reason shocks to demand adversely impact employment is because prices and wages are sticky downward -- and considerably so, and this "pent up wage deflation" amongst people who did keep their jobs might explain tepid wage gains today.

Anyway, the logic is that, over longer periods of time, as Friedman and Phelps showed us, there is no trade-off between unemployment and inflation. We can push unemployment below the natural rate in the short run, but in the longer run prices and wages become flexible, the short-run Phillips curve becomes steeper such that it more resembles the LRAS curve, inflation expectations rise, and we end up with permanently higher inflation, but no rise on net in output. To a large degree, this explains why stagflation of the 1970s, and the subsequent Volcker Disinflation, were so severe.

This is a wonderful question, and it underscores my case. Effectively, I need to take apart the New Keynesian Phillips curve. Indeed, I'm not going to argue that that we can reduce the unemployment rate below its natural benchmark such that we're essentially picking a combination of unemployment and inflation. I'm not even arguing that monetary policy can impact real variables in the long run -- which obviously it cannot, because once prices and wages adjust, monetary policy can only move nominal variables (inflation, nominal interest rates, nominal wages, NGDP), but not real variables (unemployment, real interest rates, real wages, RGDP).

Part of my case is a famous line from John Maynard Keynes: "In the long run we'll all dead." Essentially, leave structural reform to fiscal policymakers, and let the Fed do its job: managing aggregate demand. Instead of assuming that prices will magically adjust at some later date, assume -- rightly -- that the short run can undermine the long run. For instance, allowing for an extended period of high unemployment can lead to hysteresis: workers become long-term unemployed, see their skills erode, and then find themselves unable to find employment. In other words, if the Fed or Congress are asleep at the job, they can have deleterious impacts on the economy's long-run potential.

Next, and most crucially, I'll be arguing that the so-called "negative" correlation between unemployment and inflation isn't quite negative. I'm going to argue that the relationship is actually rather flat: that inflation isn't very sensitive to changes in the unemployment gap. There are several possible explanations for this, most notably globalization easing supply pressures and better conduct of monetary policy in the post-Volcker era anchoring longer-run inflation expectations; said otherwise, the public expects that deviations of inflation from target are transitory, and that the Fed, following what is more or less a Taylor Rule, will adjust for and correct these deviations. The punchline is that overheating won't actually yield broad-based price pressures.

3. Okay, so if it doesn't lead to an uptick in inflation, what's the issue? Why did you bother to create a debate on it?

It's controversial for several reasons, and is not a position readily endorsed by the FOMC. Indeed, Janet Yellen a few months ago said, outright, "We will not overheat." The current narrative by the Fed is that it wants to move to increase interest rates sooner -- perhaps as early as September -- and then move at a more gradual pace. If the Fed were to listen to me, the worry is that it might need to hike faster and at a steeper trajectory, which might be excruciatingly painful.

Exaggerated? Perhaps. But the rate path in my world would be much steeper and more, well, vicious -- we would start late and end at virtually the same time, unless I actually manage to move the long-run equilibrium rate upward (hint: that's my goal), in which case we're in business for a lot longer.

So, aside from a steeper rate path -- which might drive financial markets absolutely insane, and could itself muck up the transmission mechanism (because financial markets will, essentially, predict the rate path to set long-term rates, so the price adjustment will be magnified if I wait longer to start--and market illiquidity, memories of the Taper Tantrum, credibility concerns, etc. will only exacerbate this) -- there are several more costs to my proposal.

One, the Fed has told us they're data dependent, and markets believe it, more or less. But, unless things really hit the fan, it's not going to hold off until 2016 to begin to hike rates, and if it does, they won't be willing to overheat. I'm advocating for a regime shift -- an actual change in the underlying reaction function. Realistically, I'm sticking myself with an unbelievable burden of proof.

Two, the reason the Fed can take such drastic measures is because inflation expectations over the longer term are well-anchored--due to its history of viciously breaking inflation's neck--so QE, Twist, zero-bound rates, etc. don't send TIPs breakevens soaring. If the Fed commits today to higher inflation, and it's credible, inflation will rise. If it isn't credible, and inflation comes to fruition--as it would, however slowly--those breakevens will rise.

Three, the sensitivity of the unemployment gap is a double-edged sword. Assuming I don't unanchor expectations, inflation will rise only slowly. But the gains from overheating actually *come* from wage pressures, so it might require an extended period of resource o

First, the mechanism behind overheating isn't making a conscious decision to decisively, for the fun of it, create inflationary pressures and then knock them down. If that were my goal, then I'm the biggest arshole who has ever lived. I doubt that if I were a Fed Governor advocating that, that would be conducive to me being reappointed. The underlying vehicle of overheating is holding off on hiking rates: accepting that the risk calculus is heavily weighted toward tightening too early. I would look to, for instance, Sweden in 2011, the ECB in 2011, and Japan in both 2000 an 2006, all of which tightened policy too early and were met with highly severe consequences. Insofar as the Fed can maintain credibility by squashing inflation afterwards, the only cost is a slightly uptick in inflation--which isn't actually so bad, in reality, because inflation has been considerably low for a long time.

Two, my proposal might actually boost the Fed's credibility and the credibility of its long-run inflation target. Indeed, if inflation can run, unfettered, below 2 percent for well over six years, people will begin to expect that 2 percent is a ceiling, rather than a symmetric target. That means that people, in the future, will doubt the weigh of the negative output gap in the Fed's reaction function -- or, in other words, doubt the Fed's resolve at restoring output to potential. As a result, people may expect lower inflation and higher future nominal interest rates, both of which apply upward pressure on longer-term interest rates, which depress spending and investment and form a self-reinforcing cycle.

Three, I might push trend growth upward. Partly as a result of the depth of the recession, longer-run potential growth is currently projected at about 100 basis points below its longer-run average. That obviously has implications for wage gains, for innovation, for spending, for living standards. Not to mention, it reduces the long-run equilibrium real interest rate. Historically, it's been about 2 percent. Let's say, for the sake of argument, that it's only 1 percent. If you add a 2 percent inflation target to the long-run average, we get a natural fed funds rate of 4 percent. That gives the Fed considerable room in the future to actually slash interest rates to smooth over short-run output fluctuations. Take the 1 percent, though. Add a 2 percent inflation target to that, and we get a long-run natural funds rate of 3 percent. If that were the case, there is still *some* room to slash interest rates, but what if the rate is 0 percent? What if demographics and tepid technological gains have pushed it negative? We may not ever be able to normalize policy, and may be stuck with QE and forward guidance in perpetuity, the impacts of which are much more uncertain and volatile than conventional rate cuts.

5. What's the mechanism for boosting trend growth?

There are a few. First, I'm allowing wage and price pressures to build. Assuming a reasonable labor supply elasticity with respect to income, that would induce people who have been sitting on the sidelines -- e.g., marginally attached -- to re-enter the labor force. Because labor demand is up considerably, people employed part-time, but who want full-time work, may be able to finally find full-time work. (Yes, Jeb Bush, that is "working longer hours.") A larger labor stock means higher labor productivity, and business formation and investment in R&D may pick up, so insofar as the decline in productivity is cyclical, it will begin to pick up. This may also smooth over consumer deleveraging because higher inflation reduces the real value of fixed debt burdens, and allow credit standards to steadily ease.

Here's the best part, too. Remember those costs I mentioned earlier? If I succeed in actually boosting trend growth, I throw a hammer in those costs. If the LRAS curve shifts out, that means the spread between actual and potential output -- or actual demand and potential demand -- widens. Ceteris paribus, that applies downward pressure on inflation, and gives the Fed more room to easy policy. In fact, it might even give way to a less painful tightening cycle.

is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

A few people do, yes, and they've asked that I continue making them, and thus I do. Primarily, though, I made these posts for a few people who were interested in my debate challenge, but didn't quite feel up to snuff with the material.

Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO?

I don't think it's a waste of time; it's fun for me, and it lets me think through my position and articulate it in a way that's broadly accessible.

If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

It's not mutually exclusive. I have a blog, but those posts take a lot more time and effort because I'm marketing them to an audience that knows just as much, if not more, than I do. Usually, those require some hardcore spreadsheet work. These are a lot easier to make, and better suited to my schedule.

A few people do, yes, and they've asked that I continue making them, and thus I do. Primarily, though, I made these posts for a few people who were interested in my debate challenge, but didn't quite feel up to snuff with the material.

Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO?

I don't think it's a waste of time; it's fun for me, and it lets me think through my position and articulate it in a way that's broadly accessible.

If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

It's not mutually exclusive. I have a blog, but those posts take a lot more time and effort because I'm marketing them to an audience that knows just as much, if not more, than I do. Usually, those require some hardcore spreadsheet work. These are a lot easier to make, and better suited to my schedule.

What am I missing?

Lots of things.

ok, fair enough, but everything on the internet is broadly accessible. I'm wondering what you might be missing by not participating elsewhere, but hey, I got no problem with it.

A few people do, yes, and they've asked that I continue making them, and thus I do. Primarily, though, I made these posts for a few people who were interested in my debate challenge, but didn't quite feel up to snuff with the material.

Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO?

I don't think it's a waste of time; it's fun for me, and it lets me think through my position and articulate it in a way that's broadly accessible.

If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

It's not mutually exclusive. I have a blog, but those posts take a lot more time and effort because I'm marketing them to an audience that knows just as much, if not more, than I do. Usually, those require some hardcore spreadsheet work. These are a lot easier to make, and better suited to my schedule.

What am I missing?

Lots of things.

ok, fair enough, but everything on the internet is broadly accessible. I'm wondering what you might be missing by not participating elsewhere, but hey, I got no problem with it.

I don't think I'm "missing" anything, per se. I mean, it isn't as though the things I write here are by any means profound. You could probably find three or four columnists or ecobloggers making the exact same arguments, plus or minus some model on labor supply elasticity.

At 7/25/2015 6:25:23 AM, ax123man wrote:is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

What am I missing?

I read them.

#preparingforeconmajor.

-~-~-~-~-~-~-~-Lannan13'S SIGNATURE-~-~-~-~-~-~-~-

If the sky's the limit then why do we have footprints on the Moon? I'm shooting my aspirations for the stars.

"If you are going through hell, keep going." "Sir Winston Churchill

"No one can make you feel inferior without your consent." "Eleanor Roosevelt

At 7/24/2015 6:29:59 PM, ResponsiblyIrresponsible wrote:4. What are the gains of overheating?

I'm curious to hear about your thoughts on the decline on commodities. Since the decline is due to China's crash and declining demand. Does the effect on lower commodity prices offset should the Fed raise rates sooner rather than later.

I do agree the tendency is for central banks to raise rates to put on the breaks and avoid overheating, but you said it well with this:

We may not ever be able to normalize policy, and may be stuck with QE and forward guidance in perpetuity, the impacts of which are much more uncertain and volatile than conventional rate cuts.

Quantitative easing is not linear in effect. There is still question whether we could even overheat with the level of QM we have been sustaining in today's economic environment. Overheating requires that aggregate demand grows. Our problem is that aggregate demand is not growing because disposable income is not growing.

We overheated so much in 2008 that we can't even manufacture overheating seven years later and globally, deflation is the looming threat.

On a political note what is going on here is proof that supply side economics is not the end all of end all and all this talk from Republicans about flat taxes and other strategies will result in disaster because it pushes pressure on aggregate demand by reducing low and middle class disposable income, which in turn puts us in deflation mode and inflationary tools used by the Fed become less effective.

I think the Fed is freaked out about bubbles, but it seems bubbles are rather easy to spot just by the level of inflation. The problem is that when they are spotted, nobody wants to put the break on them. My thought is that the global decline in commodities will impact us more negative than positive: IE: Oil jobs. We are probably in for at least a correction and possibly minor recession. Might as well put the Feds balance sheet to the $6 Trillion mark. How big can that balance sheet grow before there is a significant drop in the value of the dollar is the $64 million dollar question. That seems to be the greater risk rather than inflation and overheating.

At 7/24/2015 6:29:59 PM, ResponsiblyIrresponsible wrote:4. What are the gains of overheating?

I'm curious to hear about your thoughts on the decline on commodities. Since the decline is due to China's crash and declining demand. Does the effect on lower commodity prices offset should the Fed raise rates sooner rather than later.

I think the Fed has a habit -- and rightly so -- of looking through transitory price declines in commodities, as they did when prices tanked in 2009 and rose in 2010 to early 2011, and focusing on underlying inflation as measured by the core index. Granted, it's all interesting when people (whom Paul Krugman calls "permahawks") were rebuking the Fed for not raising interest rates back in 2011, but saw the oil slide as transitory.

I do agree the tendency is for central banks to raise rates to put on the breaks and avoid overheating, but you said it well with this:

We may not ever be able to normalize policy, and may be stuck with QE and forward guidance in perpetuity, the impacts of which are much more uncertain and volatile than conventional rate cuts.

Quantitative easing is not linear in effect. There is still question whether we could even overheat with the level of QM we have been sustaining in today's economic environment. Overheating requires that aggregate demand grows. Our problem is that aggregate demand is not growing because disposable income is not growing.

The latter point just isn't true: disposable income *has* been growing [https://research.stlouisfed.org...], and has aggregate demand, or NGDP [https://research.stlouisfed.org...]. The rate of increase is inadequate, surely, but doing nothing would eventually cause us to cross that point, irrespective of whether the Fed were to re-initiate QE or not (and they won't, because the credibility implications of that are dire).

We overheated so much in 2008 that we can't even manufacture overheating seven years later and globally, deflation is the looming threat.

When did we overheat in 2008? That just isn't true. The anomaly of the housing bubble, which actually prompted this discussion over secular stagnation, is that the economy actually *did not* overheat via conventional measures of overheating, and that it only grew at a reasonable pace under a bubble. It also wasn't in any way the Fed's doing.

I don't think outright deflation is the looming threat, at least not in the US, because of price rigidity, as this paper from Del Negro et al. shows [http://www.newyorkfed.org...]. Disinflation, however, is a problem.

On a political note what is going on here is proof that supply side economics is not the end all of end all and all this talk from Republicans about flat taxes and other strategies will result in disaster because it pushes pressure on aggregate demand by reducing low and middle class disposable income, which in turn puts us in deflation mode and inflationary tools used by the Fed become less effective.

That's not supply-side economics in theory, but in practice. Only in practice would a commitment to tax cuts actually *reduce* the disposable incomes of some. Again, we're not, nor have we ever been in recent years -- save for a short period in 2009 via the headline index due to commodity prices -- in deflation, but tax cuts generally should apply upward pressure on inflation insofar as the demand effect exceeds the supply-side effect, and it gives the Fed more room to actually move. In reality, it's a failure of the Fed, not of tax cuts.

I think the Fed is freaked out about bubbles, but it seems bubbles are rather easy to spot just by the level of inflation.

I disagree with this. Jeffrey Frankel from Harvard had a great several years ago noting that bubbles are *not* associated with a buildup in inflation, nor was that the case in the lead-up to the housing bubble. By that metric, because inflation has been so low recently, bubbles aren't even theoretically possible, which just isn't the case.

The problem is that when they are spotted, nobody wants to put the break on them.

They're hard to spot, so I don't know of any instance where the Fed "spotted" a housing bubble. But there's also very limited evidence and support for actually leaning on them, and much more research -- two papers off the top of my head, actually -- suggesting that the optimal response is to do virtually nothing, or to raise rates by about 3 basis points via a cost-benefit analysis. The extent to which they would actually have to raise rates to pop it is astounding, especially when they're merely going to have to slash them once more, credibility be darned. They're much better off dealing with bubbles via regulatory tools and then cleaning up the mess after.

My thought is that the global decline in commodities will impact us more negative than positive: IE: Oil jobs.

I'm somewhat inclined to agree with this, and the impact on capital investment in recent months has far overshadowed the gains to consumption.

We are probably in for at least a correction and possibly minor recession.

I think this is *way* too pessimistic. A stock correction? Perhaps, but that need not -- and will not -- a recession make, especially when the fundamentals of the economy generally are strong.

Might as well put the Feds balance sheet to the $6 Trillion mark. How big can that balance sheet grow before there is a significant drop in the value of the dollar is the $64 million dollar question. That seems to be the greater risk rather than inflation and overheating.

Now you sound like a goldbug, lol. The Fed doesn't need to expand its balance sheet -- at all -- to provide further stimulus, though even if it did that wouldn't necessarily spell a drop in the dollar because banks would simply hold onto excess reserves, the public would believe that the Fed would mop up excess liquidity after the fact (that's why they've unveiled and are testing the TDF), and additional steps toward stimulus would -- and should -- actually improve prospects for longer-term growth, which would increase the *relative* (and that word is key) position of the U.S. relative to the world economy, which would probably push the exchange rate upward, as it has.

I don't believe overheating is obtainable in today's environment.

On this we disagree, but primarily that's because you're a skeptic of monetary policy (and, for that matter, I guess of government data releases which clearly show demand growing).

At 7/25/2015 6:25:23 AM, ax123man wrote:is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

What am I missing?

I read these posts. I found DDO when came up on top in a Google search for economics forums. I would venture to guess that there are more lurkers than participants in this forum

Everyone stands on their own dung hill and speaks out about someone else's - Nathan KrusemarkIts easier to criticize and hate than it is to support and create - I Ron Slippers

At 7/25/2015 6:25:23 AM, ax123man wrote:is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

What am I missing?

I read these posts. I found DDO when came up on top in a Google search for economics forums. I would venture to guess that there are more lurkers than participants in this forum

All I'm saying is that if you wanted to put your knowledge to the test, or listen in on the nations intellectual debate on economic subjects, DDO isn't the place to do it. There are a number of economists who are tied into that world who have active blogs. And, in some of them, there is a high level of commentary with blog authors participating in that commentary. We are all very fortunate to have that available to us. Anyway, for me, in no particular order, it's:

At 7/25/2015 6:25:23 AM, ax123man wrote:is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

I certainly read the posts. I see value in reading what others have to say, and in discussing economics, for the sheer enjoyment of it.

As for "having an effect," there I have to ask what place could really do that?

There are definitely a bunch of tremendously smart people, and interesting theories, and cool models, formulas, etc., but in the end, what real, substantive difference will it all make?

I ask that because for all the talk, the U.S. has the vast and increasing debt, and even larger unfunded liabilities. A national debt of over $150,000 per taxpayer, and unfunded liabilities of over $800,000 per taxpayer. Even with the current very low interest rates, the U.S. is paying almost a quarter of a trillion Dollars per year, just in interest on the debt.

We can say that "it's worse in some other countries," and we are (for now, at least) the "market of last resort" for many people around the world, yet I still see a one-way process going on here, and that's regardless of who's in the White House and who controls Congress.

At 7/25/2015 6:25:23 AM, ax123man wrote:is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

I certainly read the posts. I see value in reading what others have to say, and in discussing economics, for the sheer enjoyment of it.

As for "having an effect," there I have to ask what place could really do that?

There are definitely a bunch of tremendously smart people, and interesting theories, and cool models, formulas, etc., but in the end, what real, substantive difference will it all make?

I ask that because for all the talk, the U.S. has the vast and increasing debt, and even larger unfunded liabilities. A national debt of over $150,000 per taxpayer, and unfunded liabilities of over $800,000 per taxpayer. Even with the current very low interest rates, the U.S. is paying almost a quarter of a trillion Dollars per year, just in interest on the debt.

We can say that "it's worse in some other countries," and we are (for now, at least) the "market of last resort" for many people around the world, yet I still see a one-way process going on here, and that's regardless of who's in the White House and who controls Congress.

I'm glad your interested in econ - if only everyone was. And I agree with your assessment of the situation. The collapse is inevitable. However, it is the intellectuals who will have the most influence when things get ugly. The question is what happens after and I plan to do what I can to convince anyone who listens that the idea of separation of economy and state is as natural as the separation of church and state. I read the blogs of the economists above because that is where the intellectually stimulating debate is - the best arguments against the free market.

I started this all mainly because ResponsiblyIrresponsible was political, policy oriented and pro-stimulus. He thinks a couple thousand economists can improve the economy thru central planning. I fundamentally disagree with that. I'll be honest - I doubt anyone at DDO is qualified to argue the finer points of stimulus. ResponsiblyIrresponsible tried to make the point to me, paraphrased, "this is all basic, standard stuff". I'm not buying it. It's only basic and standard if you just roll over and believe the central planning formulas work as spec'd out. The finer points are very nuanced and complex. If you don't believe me, start reading the blogs of the intellectuals.

At 7/25/2015 6:25:23 AM, ax123man wrote:is anyone reading these posts? Not trying to be a jerk here, but really, why are you waisting your time with this stuff on DDO? If you can add value to the discussion re: economics, why not do it somewhere where it will actually have an affect?

I certainly read the posts. I see value in reading what others have to say, and in discussing economics, for the sheer enjoyment of it.

I read the blogs of the economists above because that is where the intellectually stimulating debate is - the best arguments against the free market.

Plus the blogs are often interesting, stimulating and are not shy of controversy:

At 8/3/2015 7:11:22 PM, ax123man wrote:I started this all mainly because ResponsiblyIrresponsible was political, policy oriented and pro-stimulus.

I'm not political. I make a conscious effort to shy away from politics and focus only on policy substance, which is why I break so heavily from the political parties and why, about a month ago, I was actually willing to support Bernie Sanders. No sensible person jumps from Bernie to Jeb. I never made an endorsement. I focus on policy substance.

He thinks a couple thousand economists can improve the economy thru central planning.

This is a complete strawman, and underscores the extent to which you don't understand my positions, which makes the ad hominem all the more vacuous.

I fundamentally disagree with that.

I do too. It's not my position. If you've read anything that I've been saying in recent months, you'd see that I'm actually very pro-free market. I made a case against capital gains taxes not long ago.

I'll be honest - I doubt anyone at DDO is qualified to argue the finer points of stimulus.

I think it's a bit disgusting to make assumptions about member's qualifications, or to assume that I'm not in a position to opine or to make the case for stimulus. I've been studying this material for several years, and I've worked on several empirical research projects -- and read more academic papers and blogs than I'm able to readily count. I'm more than qualified to make the case for stimulus.

ResponsiblyIrresponsible tried to make the point to me, paraphrased, "this is all basic, standard stuff". I'm not buying it.

Once again, that's a complete strawman. That has never been my case (and if you expect me to write my posts, which people already view as too complex, with reference to DSGE models or something, you're insane), though to be perfectly honest I should have made an argument to that effect. The entire debate over macro policy is predicated on one central question: the efficiency of markets and their ability to clear. I think the last six years, as well as a myriad of empirical research, has overwhelmingly developed in the New Keynesian direction: wages are sticky downward, and thus shocks to demand induce a lot of involuntary unemployment.

It's only basic and standard if you just roll over and believe the central planning formulas work as spec'd out. The finer points are very nuanced and complex. If you don't believe me, start reading the blogs of the intellectuals.

I do read their blogs, and my positions are heavily conditioned on much of the empirical work I've been studying for years. Don't make assumptions.

At 8/3/2015 7:11:22 PM, ax123man wrote:I started this all mainly because ResponsiblyIrresponsible was political, policy oriented and pro-stimulus.

I'll be honest - I doubt anyone at DDO is qualified to argue the finer points of stimulus.

What the? I thought you closed your account! Glad to see your back. I'm pretty sure that comment was written after I thought your account was closed.

I reactivated, but it's nice to know that you wrote the comment under the mindset that i wouldn't see it and wouldn't be able to respond to it. If you want to attack me, I'd much prefer you do it actively to my face, instead of passive-aggressively behind my back.

So, is there, besides you, someone what can do that? If so, ok. I'm wrong.

Someone who can do what? Make the case for stimulus? I mean, you insinuated that I was also unqualified. But, yes: 16k could surely make the case.

At 8/3/2015 7:11:22 PM, ax123man wrote:I started this all mainly because ResponsiblyIrresponsible was political, policy oriented and pro-stimulus.

I'll be honest - I doubt anyone at DDO is qualified to argue the finer points of stimulus.

What the? I thought you closed your account! Glad to see your back. I'm pretty sure that comment was written after I thought your account was closed.

I reactivated, but it's nice to know that you wrote the comment under the mindset that i wouldn't see it and wouldn't be able to respond to it. If you want to attack me, I'd much prefer you do it actively to my face, instead of passive-aggressively behind my back.

So, is there, besides you, someone what can do that? If so, ok. I'm wrong.

Someone who can do what? Make the case for stimulus? I mean, you insinuated that I was also unqualified. But, yes: 16k could surely make the case.

I wasn't clear. I wrote that statement when I thought you were no longer on DDO. I went to your profile and it said your account was closed. And I wouldn't have said that otherwise, because I was still thinking about your original posts and wondering who was getting value from it. I was genuinely thinking you'd get more value elsewhere. On the other stuff, yea,, I fess up. I jump to conclusions. I'm working on it..... Feel free to stomp on me if you catch me again :)

At 8/3/2015 7:11:22 PM, ax123man wrote:I started this all mainly because ResponsiblyIrresponsible was political, policy oriented and pro-stimulus.

I'll be honest - I doubt anyone at DDO is qualified to argue the finer points of stimulus.

What the? I thought you closed your account! Glad to see your back. I'm pretty sure that comment was written after I thought your account was closed.

I reactivated, but it's nice to know that you wrote the comment under the mindset that i wouldn't see it and wouldn't be able to respond to it. If you want to attack me, I'd much prefer you do it actively to my face, instead of passive-aggressively behind my back.

So, is there, besides you, someone what can do that? If so, ok. I'm wrong.

Someone who can do what? Make the case for stimulus? I mean, you insinuated that I was also unqualified. But, yes: 16k could surely make the case.

I wasn't clear. I wrote that statement when I thought you were no longer on DDO. I went to your profile and it said your account was closed. And I wouldn't have said that otherwise, because I was still thinking about your original posts and wondering who was getting value from it. I was genuinely thinking you'd get more value elsewhere.

I generally agree, though again my posts aren't mutually exclusive. I post more substantively elsewhere.

On the other stuff, yea,, I fess up. I jump to conclusions. I'm working on it..... Feel free to stomp on me if you catch me again :)

btw RI, to me being "very free market", as you stated you are, is incompatible with central banking by definition (I mean, it's a monopoly on the single most important resource in the economy). I admit I don't have the knowledge to debate you on this stuff. But after reading the debates (primarily between Murphy and the others) for some time now, it appears to me it's far from settled. Maybe it's all due to my own lack of knowledge. I'm certainly not ruling that out, but Murphy seems to make a lot of sense to me.

So here's the thing that is interesting about all this. The economy is very complex, the market is made up of unique decisions of individual actors, and it's difficult (impossible?) to make empirical readings "ceteris paribus", and the debate about central banking rages on. So why is it that the default position of otherwise free market economists is a complete monopoly when it comes to money? Being on the outside looking in, it appears very much like an institution has grown up and now needs to be supported regardless. It's really similar to the business of the war on drugs. I mean an economist who was an advisor to Bush (Mankiw) certainly can't take an anti-Fed position. If you want to be "relevant" today, you need to support central banking, which makes me suspicious of those on the side of CB.

At 8/7/2015 11:32:28 AM, ax123man wrote:btw RI, to me being "very free market", as you stated you are, is incompatible with central banking by definition (I mean, it's a monopoly on the single most important resource in the economy). I admit I don't have the knowledge to debate you on this stuff. But after reading the debates (primarily between Murphy and the others) for some time now, it appears to me it's far from settled. Maybe it's all due to my own lack of knowledge. I'm certainly not ruling that out, but Murphy seems to make a lot of sense to me.

I don't think it's contrary to the free market to not support internal currency competition. I mean, if it is, I suppose that's a restriction I'm willing to accept, because when we look at countries that don't borrow in their own currencies -- the Eurozone is perhaps the best example -- the result is a complete disaster because they fail on every aspect of optimum currency area theory: assymetric business cycles, lack of centralized, cross-country fiscal transfers, lack of flexible labor markets and labor mobility, etc.

Now, if I wanted a fixed exchange rate or capital controls, you could make that case, but I don't. I mean, it indeed pisses me off when China depreciates because obviously it harms U.S. exporters -- notwithstanding the possible benefits of that, of course, since China is such a global superpower subsuming an increasing share of global demand -- but I'm not going to advocate a Trump-esque tariff. I think my support for floating exchange rates, perfect capital mobility, and free trade far overshadows my lack of support for a domestic currency not issued by the U.S. Treasury.

I didn't read the full piece - mainly because I lack the time and will - but it seems like a highly theoretical (read: not grounded in data) argument. The problem is that we do have data saying the complete opposite.

Look at page 43 -- that's the distribution of log wage changes in the years leading up to and immediately following the financial crisis. We see a giant spike at zero changes. Then look at the second graph on page 44 and the second graph on page 46: that's the evolution of the wage Phillips curve,and that the coefficient of the unemployment gap is so small shows that real wages are heavily countercyclical (e.g., if the economy sucks, inflation falls, nominal wages are sticky, so real wages rise).

And I said I wouldn't talk about DSGE models -- frankly, because I think they're highly stylized and boring -- but here's a good one: [http://www.newyorkfed.org...].

If Bob Murphy were right, wages should be able to adjust to equilibrate markets. If wage flexibility were perfect (LRAS is perfectly inelastic), that adjustment is fairly rapid. If we account for labor unions, MW laws, etc. -- and I would hope Murphy would -- that might make wages stickier, then we get a reflexively more elastic Phillips Curve. Demand shocks should have some effect, but the impact is muted.

But the problem is that we had a giant drop-off in commodity prices in 2009 -- after, indeed, a boom in 2008. Prices fell, signaling a demand shock, but didn't fall that much, even though both (a) a negative demand shock and (b) a positive supply shock, both of which apply downward pressure on prices, were acting upon them. The core index on anything other than a month-to-month frequency (in which case it fell slightly negative in October 2008) didn't dip much below 1 percent. The only DSGE model that could readily explain that was one with a price rigidity parameter of about .81; the other models predicted outright and sustained deflation.

Of course, the funny story there is the question of whether wages are more sticky than prices. I think they are, but there's plenty of research showing that they lag changes in inflation [https://www.clevelandfed.org...]; [http://papers.ssrn.com...]; and [http://www.federalreserve.gov...]. If wages and prices actually moved together, deflation wouldn't be a concern. That they don't is symptomatic of money illusion, and fuels the New Keynesian narrative that downward nominal wage rigidity does in fact induce unemployment.

So here's the thing that is interesting about all this. The economy is very complex, the market is made up of unique decisions of individual actors, and it's difficult (impossible?) to make empirical readings "ceteris paribus", and the debate about central banking rages on. So why is it that the default position of otherwise free market economists is a complete monopoly when it comes to money?

I mean, what's the alternative? With currency competition, we lose the ability to run an independent monetary policy. The sequence of consequences evolves as:

(1) Monetary policy loses its vigor.(2) Wages and prices are still sticky.(3) Boom goes the demand shock.(4) We have three or four active currencies, so heaven knows which one we're actually going to focus on.(5) I shutter to think of what would happen to interest rates, since those tend to move -- in real terms -- with the value of the dollar.

I just can't see anything, save for vague moralizing, in the way of a decent argument for a privately issued currency. I think that paves the way for currency crises if people have debts denominated in plummeting currencies (e.g., the euro), and I'm sure you'd probably have some sort of "habitat preference" with respect to holding assets denominated in one currency. The self-correcting mechanisms of a currency falling to boost exports when the economy is in a rut would completely disintegrate as well, though we know that was instrumental in getting the U.S. out of the Depression and Argentina out of its hole in the early 2000s -- or, for that matter, Japan in 2012 (though stunningly, as a sort of "screw you" to Paul Krugman, their nominal interest rates were already at zero).

Being on the outside looking in, it appears very much like an institution has grown up and now needs to be supported regardless. It's really similar to the business of the war on drugs. I mean an economist who was an advisor to Bush (Mankiw) certainly can't take an anti-Fed position. If you want to be "relevant" today, you need to support central banking, which makes me suspicious of those on the side of CB.

I don't think there's a reasonable alternative to central banking. I don't want fiscal policy to ameliorate demand shocks, and I shutter to think of what a truly unfettered capitalist system would look like. I agree with the Austrians that government intervention induces sticky wages, and some of that can be ameliorated -- e.g., abolishing the MW is something I've supported for a while. But I think some of that is necessary, or Pikkety's conclusions (yup, I'm citing Pikkety) of an economy of nobility or of inherited wealth would be borne out. I can't envisage any reasonable alternative to that with completely unfettered markets.

At 8/7/2015 11:32:28 AM, ax123man wrote:btw RI, to me being "very free market", as you stated you are, is incompatible with central banking by definition (I mean, it's a monopoly on the single most important resource in the economy). I admit I don't have the knowledge to debate you on this stuff. But after reading the debates (primarily between Murphy and the others) for some time now, it appears to me it's far from settled. Maybe it's all due to my own lack of knowledge. I'm certainly not ruling that out, but Murphy seems to make a lot of sense to me.

I don't think it's contrary to the free market to not support internal currency competition. I mean, if it is, I suppose that's a restriction I'm willing to accept, because when we look at countries that don't borrow in their own currencies -- the Eurozone is perhaps the best example -- the result is a complete disaster because they fail on every aspect of optimum currency area theory: assymetric business cycles, lack of centralized, cross-country fiscal transfers, lack of flexible labor markets and labor mobility, etc.

Without government, the best currency wins. There were currencies before central banks. Even though there may be competition, there isn't /necessarily/ multiple currencies.

I don't get your point about "borrowing in their own currencies". Are you saying everyone except government would use, say gold, but government would still be working with fiat? Gresham's law would drive out fiat. I'm sure I'm just not understanding.

Now, if I wanted a fixed exchange rate or capital controls, you could make that case, but I don't. I mean, it indeed pisses me off when China depreciates because obviously it harms U.S. exporters -- notwithstanding the possible benefits of that, of course, since China is such a global superpower subsuming an increasing share of global demand -- but I'm not going to advocate a Trump-esque tariff. I think my support for floating exchange rates, perfect capital mobility, and free trade far overshadows my lack of support for a domestic currency not issued by the U.S. Treasury.

I want everyone on gold - no more currency wars. As far as China vs us, the economy that is most productive "wins" ultimately. Competition is the ultimate driver of success and the lack of it drives failure. If U.S. citizens don't like it, create something people want at the right price point. Besides I don't really see this as a battle with China. If they succeed, doesn't that help us? Or was Ricardo & Smith wrong about trade?

Regarding China's depreciation and it's affect on trade, same thing - on gold the best producer wins. It pisses me off too. Are you ok if WE do it? If so, then both countries work try to wipe out their middle class. Splendid.

I didn't read the full piece - mainly because I lack the time and will - but it seems like a highly theoretical (read: not grounded in data) argument. The problem is that we do have data saying the complete opposite.

<snip out proof of stickiness>

If Bob Murphy were right, wages should be able to adjust to equilibrate markets. If wage flexibility were perfect (LRAS is perfectly inelastic), that adjustment is fairly rapid. If we account for labor unions, MW laws, etc. -- and I would hope Murphy would -- that might make wages stickier, then we get a reflexively more elastic Phillips Curve. Demand shocks should have some effect, but the impact is muted.

Murphy isn't claiming sticky wages don't exist. He's arguing that government is the cause. And as far as empirical evidence (of wages adjusting), he gave an example of that with the 1920-21 depression. I'm not actually sure if Murphy would argue that wages wouldn't stick AT ALL without MW, Unions, Unemployment, Welfare, but it HAS to have a MAJOR affects. When death by starvation is looming, you'll take what you can get.

But, given the nightmare of government we live in, you could very well be correct about all this. That question is over my head. But I'd prefer to solve the regulation-up-regulation problem by unwinding regulation.

What's the "best" currency? The strength of a currency is predicated on a number of factors, but particularly the state of that country's economy, and thus of interest rates which tend to be highly procyclical. By having multiple domestic currencies, you erode that connection between the state of a country's domestic economy relative to the world economy and the desirability of holding that country's currency. I can't imagine what would drive people from one currency to the next.

There were currencies before central banks.

Sure, people used rocks as a form of currency, lol. But there was never a currency in the form we have today that was intricately tied to the global financial system.

Even though there may be competition, there isn't /necessarily/ multiple currencies.

I mean, there will be *some* competition. One might prevail, in which case it would be hard to say there's "perfect competition," but I don't see how that's the least bit desirable.

I don't get your point about "borrowing in their own currencies". Are you saying everyone except government would use, say gold, but government would still be working with fiat? Gresham's law would drive out fiat. I'm sure I'm just not understanding.

"Borrowing in their own currency" means that their debt burdens are denominated in dollars, so the country has the ability to print that currency to control domestic interest rates. Countries that issue their own country haven't had a problem borrowing, contra Greece for example which shares the euro with 18 other currencies.

I had to look up Gresham's Law. All that really suggests is that currency competition would breed arbitrage. That makes sense, but (a) that's undesirable, because we want control over the currency and (b) it would just be an endless chain, because currency competition would mute, but not eliminate, the role of an independent monetary authority.

I want everyone on gold - no more currency wars.

Why? A gold standard was disastrous. As I'm sure you know, that contributed to the Great Depression, and FDR devaluing the dollar against the gold helped to end it. Pegging the dollar to the price of gold, much like the European currency union, is a price control, so I'm surprised you support it.

Not to mention, prices are even more volatile under a gold standard, and deflation even more likely. The reason inflation is so stable today is because of an independent, credible monetary regime.

As far as China vs us, the economy that is most productive "wins" ultimately. Competition is the ultimate driver of success and the lack of it drives failure.

I agree, but that only works with processes that generate value. Currencies generate no such value -- they're solely the unit of account that people opt to hold their wealth in. Their "value" is the extent to which they actually store people's wealth, and globally there is currency competition, but that's driven by the state of the domestic economy to which that currency is linked. Again, if a country has two currencies, why would I choose one over the other?

If U.S. citizens don't like it, create something people want at the right price point.

Why would I prefer currency B over currency A?

Besides I don't really see this as a battle with China. If they succeed, doesn't that help us? Or was Ricardo & Smith wrong about trade?

I just said that China's success would help us, though there are trade-offs. China's uncompetitive, export-based model that they're currently trying to transition away from hurts us, at least in the short run when real exchange change with nominal exchange rates and aren't determined by fundamentals, because it boosts Chinese exports at the expense of U.S. exports. If China's economy were to pick up, they might buy more American exports in the process, but it's not a sustainable model.

Regarding China's depreciation and it's affect on trade, same thing - on gold the best producer wins. It pisses me off too. Are you ok if WE do it? If so, then both countries work try to wipe out their middle class. Splendid.

They're not wiping out their middle class (there's no mechanism by which that would occur, barring a balance of payments crisis), nor have we ever actually engaged in it. What China does and what the U.S. for example does are completely different. China actively intervenes in foreign exchange markets, buying foreign currencies, to hold down its exchange rate. We do no such thing; we let the damned thing float, and it might move as an indirect result of policy changes, but surely we're not targeting it.

Murphy isn't claiming sticky wages don't exist.

Plenty of people have -- John Cochrane from Chicago amongst them -- and the Austrians claim that wages are "flexible enough," so the extent that I'm arguing wages are sticky, they're arguing the opposite. For our purposes, he is actively rejecting the New Keynesian position. If not, he'd want to do something about demand shocks.

He's arguing that government is the cause.

Of sticky wages? I agree: it's a significant cause. Some of the effects are behavioral in nature -- efficiency wage hypothesis, money illusion, nominal debt contracts -- but as I said earlier there are government-imposed causes: minimum wage laws are one.

And as far as empirical evidence (of wages adjusting), he gave an example of that with the 1920-21 depression.

There are so many problems with that.

First, labor markets were more flexible back in the 1920s, but that preceded the New Deal -- the rise of the MW, of labor unions, of increased labor regs, etc. Comparing labor markets in the 1920s to labor markets today is as apples to oranges as it gets.

Second, the 1920-1921 recession wasn't caused by a financial crisis that boiled over into consumer deleveraging. The 1920-1921 recession was caused entirely by the Fed trying to push down the inflationary buildup of WWI; it tightened policy, induced a recession, and then loosened policy. It was Fed-induced and Fed-cured. Hoovernomics had nothing to do with it. That's one of the most disingenuous lies I've seen libertarians use.

I'm not actually sure if Murphy would argue that wages wouldn't stick AT ALL without MW, Unions, Unemployment, Welfare, but it HAS to have a MAJOR affects.

If he wouldn't argue that the MW increases wage rigidity, he's just wrong, lol.

When death by starvation is looming, you'll take what you can get.

I agree, though that's a really horrible and morally repugnant way to unstick the wage, especially when they are better alternatives.

But, given the nightmare of government we live in, you could very well be correct about all this. That question is over my head. But I'd prefer to solve the regulation-up-regulation problem by unwinding regulation.

I agree: I'd unwind a whole lot of them and would welcome more flexible labor markets, but they'll never be -- nor would I want them to be -- flexible enough that there's no independent role for monetary policy.

Here's a challenge for anyone who doubts the "sticky wage" hypothesis. Save for actually asking you all to input a boatload of data into STATA to physically calculate a price-rigidity parameter, we'll use a much more commonly found model. No expertise required.

2. Load up a wage series. For simplicity, use "average hourly earnings: total private."

3. You can go back as far as you'd like, or simply plot multiple periods. I'd recommend setting aside the post-1983 period, after which the Fed's reaction function changed entirely (i.e., after the Volcker Disinflation).

4. Select either a monthly or quarterly frequency, or use "Percent Change from a Year Ago." This is a year-over-year, or a 12-month calculation, which filters out high-frequency noise.

5. Load up a price index. There are several you could use, but I'd recommend the "Personal Consumption Expenditures excluding food and energy" chain-type price index. The core index, which strips out food and energy prices, tends to be a lot less volatile than the headline measure and more capable of capturing underlying trends in inflation which are ultimately induced by monetary policy.

6. Same thing: select the same frequency and "percent change from a year ago."

7. Load up the unemployment rate. This is pretty easy: "Civilian Unemployment Rate." Select the same frequency you used earlier, though makes sure that your units are "percent."

8. Download the data into Microsoft Excel.

8. Create a scatterplot and add a trend line. Make sure that your dependent (Y-axis) variable is the inflation rate (Year-over-Year change in the PCE Index) and that your explanatory (x-axis) variable is the U3 unemployment rate.

9. Do the same thing, but this time use year-over-year changes in the wage index as your y-variable and the unemployment rate as your x-variable.

10. The plot you created in 8 was the price Phillips curve. In 9, you created a wage Phillips curve. Depending on the horizon over which you plotted, you'll get slightly different parameters, or coefficients for the extent to which changes in the unemployment gap impact the rate of price or wage inflation. But what you'll find is that, over recent years, this relationship has completely flattened out -- and I'd bet, without looking at the numbers myself at this moment, that the wage Phillips curve has a flatter slope.

11. The short-run Phillips curves you just plotted can be simply adjusted into an aggregate supply curve, after adjusting for Okun's law. If wages and prices were perfectly flexible, the line would be perfectly vertical and you'd have an undefined slope. If you have a defined slope, wages and prices are *sticky.* The steeper the slope, the more flexible they are. The flatter the slope, the more rigid.

At 8/8/2015 9:40:58 AM, xoSanchezxo wrote:Its too risky to produce beyond capacity, isnt it? Once the supply is higher than the demand it has negative impact on companies.

First, output -- supply and demand, or NGDP -- can exceed long-run capacity in the short run, so this isn't "supply exceeding demand." If anything, it's demand exceeding long-run supply.

Second, that's the conventional view that I laid to waste in my opening posts. It has to be done under certain circumstances and within reason, but it's by no means ipso facto detrimental.

I'm really getting tired of people commenting on my threads without actually bothering to read the opening post, and then making one-sentence points they would understand had they bothered to read the damned post. The whole point of this thread was to argue that overheating is temporarily desirable.

sounds like dismissal w/o substantive argument. And a bit like parroting consensus opinion. "Hey, I'm in the gold-is-an-ancient-relic club too!"

I don't get your point about "borrowing in their own currencies".

"Borrowing in their own currency" means that their debt burdens are denominated in dollars, so the country has the ability to print that currency

you can't print gold.

I want everyone on gold - no more currency wars.

Why? A gold standard was disastrous. As I'm sure you know, that contributed to the Great Depression, and FDR devaluing the dollar against the gold helped to end it. Pegging the dollar to the price of gold, much like the European currency union, is a price control, so I'm surprised you support it.

These ceteris paribus arguments are tiresome. There is no ceteris paribus in the real world. Statical correlations do not establish causal relationships. These sort of debates:

will go on forever cuz you can't isolate variables in a complex economy. This is why Austrians stress "a priori" knowledge over empiricism.

Calling this a price control is absurd. If I have a paper claim to a car that I plan to take possession of later, is this a price control with the paper is "pegged" to the car? Yea, it's pegged. It's a "money substitute" redeemable on demand.

Not to mention, prices are even more volatile under a gold standard, and deflation even more likely.

see above re: "gold is disastrous", my same response applies.

Besides I don't really see this as a battle with China. If they succeed, doesn't that help us? Or was Ricardo & Smith wrong about trade?

I just said that China's success would help us, though there are trade-offs. China's uncompetitive, export-based model that they're currently trying to transition away from hurts us, at least in the short run when real exchange change with nominal exchange rates and aren't determined by fundamentals, because it boosts Chinese exports at the expense of U.S. exports. If China's economy were to pick up, they might buy more American exports in the process, but it's not a sustainable model.

It all boils down to creating real wealth, so all the trade imbalance stuff is always short run. Do we really need monetary intervention for short run trade imbalances? My position on US exporters getting hurt by China, frankly, is tough. It's an entrepreneurs job to A) take risks and B) attempt to predict the future. If you think Chinese exports might hurt you, maybe that's the wrong business to be in. Of course, if an entrepreneur knows that the Fed will help them, then that changes the decision making (and not in a good way).

Regarding China's depreciation and it's affect on trade, same thing - on gold the best producer wins. It pisses me off too. Are you ok if WE do it? If so, then both countries work try to wipe out their middle class. Splendid.

They're not wiping out their middle class (there's no mechanism by which that would occur, barring a balance of payments crisis), nor have we ever actually engaged in it.

An imbalance of trade created by currency devaluation helps exporters in the short run, but it eventually balances out in currency exchange. The net result is a transfer of wealth from workers (sticky wages!) to businessmen for producers of those exports. Again, it's all moot. Gold ends currency wars.

Murphy isn't claiming sticky wages don't exist.

Plenty of people have -- John Cochrane from Chicago amongst them -- and the Austrians claim that wages are "flexible enough," so the extent that I'm arguing wages are sticky, they're arguing the opposite.

The Austrians I know of claim that wages are /capable/ of being flexible. Cochrane is irrelevant to my position.

He's arguing that government is the cause.

Of sticky wages? I agree: it's a significant cause. Some of the effects are behavioral in nature -- efficiency wage hypothesis, money illusion, nominal debt contracts -- but as I said earlier there are government-imposed causes: minimum wage laws are one.

nice. But if all that was left was behavioral aspects, is intervention necessary? Seems your stretching it at that point, like "Here, let the smart people help you to behave correctly".

And as far as empirical evidence (of wages adjusting), he gave an example of that with the 1920-21 depression.

There are so many problems with that.

First, labor markets were more flexible back in the 1920s, but that preceded the New Deal -- the rise of the MW, of labor unions, of increased labor regs, etc. Comparing labor markets in the 1920s to labor markets today is as apples to oranges as it gets.

exactly! So the answer to government intervention is. Drum roll. Government intervention!!

Second, the 1920-1921 recession wasn't caused by a financial crisis that boiled over into consumer deleveraging. The 1920-1921 recession was caused entirely by the Fed trying to push down the inflationary buildup of WWI; it tightened policy, induced a recession, and then loosened policy. It was Fed-induced and Fed-cured. Hoovernomics had nothing to do with it. That's one of the most disingenuous lies I've seen libertarians use.

In this case, you're arguing my position. It's not that fed tightening explained the problem. It was a reaction to the problem and fed (and fiscal) policy was exactly contrary to todays standard policy position. And the result was a short-lived severe recession instead of what we had with the great depression (and 2008-?)

I'm not actually sure if Murphy would argue that wages wouldn't stick AT ALL without MW, Unions, Unemployment, Welfare, but it HAS to have a MAJOR affects.

If he wouldn't argue that the MW increases wage rigidity, he's just wrong, lol.

No, that's not what I, or Murphy, said.

When death by starvation is looming, you'll take what you can get.

I agree, though that's a really horrible and morally repugnant way to unstick the wage, especially when they are better alternatives.

Just an analogy to make a point. Do you think American's would starve without welfare?

But, given the nightmare of government we live in, you could very well be correct about all this. That question is over my head. But I'd prefer to solve the regulation-up-regulation problem by unwinding regulation.

I agree: I'd unwind a whole lot of them and would welcome more flexible labor markets, but they'll never be -- nor would I want them to be -- flexible enough that there's no independent role for monetary policy.

Isn't that circular reasoning. You want to unwind leviathan, which causes the need for monetary intervention, but since that will never happen, you don't want it to happen, cuz you want monetary policy.huh?

RI, I enjoyed this but I think I'm bowing out now. On to other things.